This article has been written by Girija Menon pursuing a Training program on Using AI for Business Growth from Skill Arbitrage.

This article has been edited and published by Shashwat Kaushik.

Introduction

Business is an area, whatever the sector it may be, that comes with its big share of risks. The higher the risk, the better the returns. Strategies and calculations may go wrong for plenty of reasons. Some could be internal, and some external. Good business sense means holding on when the conditions do not favour it, capitalising when the situation is in favour, and hitting a balance when it’s a smooth path. Managing business according to the environment is in itself a big strategy that needs experience, knowledge, research, and capabilities.

Risks in business vary from business to business. Some could be seasonal, some periodic, and some depend on the environment (political and social) in the country. Risks are an integral part of any business and understanding and solving them is what eventually makes good business sense. A holistic approach to identifying, analysing, and managing risks across different layers in a professional manner is what is needed. Risks can be interconnected across various aspects of a business and can have cumulative effects on an organisation.

The primary purpose of the IRA is to enable better solutions, devise strategies, and enable better decision-making. Integrating various types of risks, such as financial, operational, environmental, and strategic, IRA helps prioritise them to take action as per their intensity on the business.

Understanding integrated risk assessment 

IRA or Integrated Risk assessment can be defined as a comprehensive approach to evaluating and managing risks, taking into consideration various factors and perspectives across multiple platforms.  It involves the assessment of data and information collected from different disciplines like environment, science, toxicology, economics, epidemiology and social circumstances / situations.  Assessing risks that emerge from these factors, which may pose a hazard to human health and wellbeing. 

Identifying types of risks is the first step in IRA. The types of risks normally faced by businesses are :

Financial risk

Financial risks in business are threats or situations that lead to loss and less profitability, and with financial risks, there is even a good chance of a business failure.  It’s very important to see a financial situation going from bad to worse, plan for the same, and manage the risk, which in a way, is indeed the most important because financial management and business run parallel, and if one falls off track, it’s not long before the business itself collapses.

Financial risks have various subcategories.  These risks can arise from various sources and affect businesses in different ways. Understanding these risks is crucial for effective financial planning and risk management. Here are the main types of financial risks in business:

• Credit Risk: When a client or customer is unable to fulfil their financial obligation for work or services that they have utilised from the company.
• Market Risk: Price fluctuation, interest rate changes, FX rules/rate changes, and changes in stock prices are a few that affect the business.
• Liquidity Risk: Financial obligation that the business cannot meet and when they are not able to raise funds or convert assets into funds at short notice.
• Compliance Risk: When the business is unable to meet rules and regulations and comply with them, the risk of being blacklisted or fined by the government is huge

Operational risk

These risks arise from internal operations like equipment failure, human errors, and technically related failures. There are also a few external events that can be categorized as operational risks. Both these risks (internal and external) can disrupt smooth business operations, which in turn impacts the business financially.

Strategic risk

Decisions on the strategic page like market competition, customer preferences, technological, and bad strategic planning.  Loss is a definite outcome of ineffective business strategies.  Bad planning and lack of execution too can be classified as strategic risk.   Strategic risks have a big impact on the business’s long-term goals, market standing, and sustainability.

Compliance risk

Regulations can originate from various sources, including local governments, international bodies, and industry-specific organisations. These regulations cover a wide range of areas, such as data protection and privacy (e.g., GDPR, HIPAA), labour and employment laws, environmental standards, financial reporting and accounting practices, and industry-specific requirements.

Consequences of non-compliance

The consequences of failing to comply with these regulations can be severe and may impact various parts of an organisation:

• Financial repercussions: Organisations found in breach of regulations can face substantial financial penalties, which can vary depending on the seriousness of the violation and the applicable laws. In addition to fines, organisations may incur legal fees, litigation costs, and potential settlements, all of which can be loss of financial resources and impact profitability.
• Reputational damage: Non-compliance can severely damage an organisation’s reputation and end stakeholder trust. Negative publicity, media scrutiny, and social media backlash can lead to a loss of customer confidence, strained relationships with business partners, and difficulties attracting and retaining talent. A damaged reputation can take years to rebuild and can have long-lasting effects on the brand’s value and market position.
• Operational disruptions: Regulatory violations may require operational changes, such as modifying processes, implementing new controls, or even temporarily suspending operations. These disruptions can lead to delays in service delivery, supply chain bottlenecks, lost business opportunities, and decreased productivity.
• Legal liabilities: In some cases, non-compliance can expose company directors, officers, and other employees to personal legal liability. This can include fines, potential imprisonment, and disqualification from holding certain positions. Legal action can also result in costly and time-consuming litigation, diverting valuable resources away from core business activities.
• Strategic implications: Regulatory risks can derail strategic initiatives, such as market expansion plans, mergers and acquisitions, and product launches. Non-compliance can also hinder innovation efforts, as organisations may need to allocate significant resources to address regulatory issues instead of investing in research and development.

Overall business impact

The negative effects of regulatory and compliance risk extend far beyond immediate financial losses. They can permeate every facet of an organisation, affecting its operational efficiency, financial stability, strategic direction, and long-term sustainability. A proactive and comprehensive approach to compliance is essential for mitigating these risks and safeguarding the organisation’s future. This includes:

• Implementing a robust compliance framework: Organisations need to establish a strong compliance framework that includes clear policies, procedures, and controls. This framework should be regularly reviewed and updated to ensure it remains aligned with evolving regulatory requirements.
• Conducting regular risk assessments: Organisations should proactively identify and assess regulatory risks, taking into account the specific industry, geographic location, and business activities. This allows for targeted risk mitigation strategies and resource allocation.
• Providing compliance training and awareness: Employees at all levels should receive regular training on relevant regulations and compliance procedures. This helps to foster a culture of compliance and ensures that employees understand their responsibilities.
• Monitoring and auditing compliance: Organisations should implement monitoring and auditing mechanisms to track compliance performance, identify potential issues, and take corrective action as needed.
• Engaging with regulators and industry bodies: Maintaining open communication and collaboration with regulators and industry bodies can help organisations stay informed about regulatory changes, address potential concerns, and demonstrate a commitment to compliance.

By taking a proactive and comprehensive approach to regulatory compliance, organisations can effectively manage risks, protect their reputation, and ensure long-term success in an increasingly complex regulatory environment.

Reputational risk

When the reputation is dented by way of negative publicity, poor product reviews, scandals, and nowadays social media backlash.  Damage has deep consequences.  The trust factor, the success of the company, and the market value of the company are hit badly.  Reputational risks are most often interconnected with other types of risks like operational, strategic, and compliance–eventually all of them leading to financial loss and loss of customers and investor confidence.

Market risk

Risks from the external market environment, economic downslides, consumer behaviour gone south, competition pressure, and shift in market demands. A financial loss always happens when market conditions do not favour.  A rippling effect on investments, assets, and operations on the negative side will take place.  Market risks are influenced by factors like natural disasters, economic downslides, political unrest, and even situations like a pandemic that hit the world in 2020–21.

Environmental risk

When a risk relates to the environment, such as natural disasters, climate change impacts, resource scarcity, and laws about the environment, they can significantly impact the supply chain of the business.

Technological risk

Technical or technological risks like cybersecurity, outdated technology, system failures, and data breaches.  There exists a range of potential issues with technology and the reliance of business on technology.  It impacts the business operations, financial stability, and reputation of the industry.

Human resource risk

Human factors like talent shortages, employee attrition, labour disputes, and safety issues relating to the workplace or employees. Risks that arise in business from managing and dealing with employees. Human beings can be complicated, and managing them and the risks that come with their contribution to the business is an important factor that needs a lot of attention and balance.

Political risk

Government policies, unrest on the political front, trade law, and restrictions. This kind of risk affects the company and leads to a downslide. Since every kind of risk is interwoven, one kind of risk also negatively impacts other areas of the business.

Project risk

Delays in meeting deadlines and project objectives. There are risks in a project that could negatively impact the completion of a project.  Some of the risks are timelines, budgets, project outcomes, and quality. Managing project risk is crucial if the business has to meet its goals and objectives.

Health and safety risk

Health risks like accidents, pandemics (like the COVID-19 pandemic, which the world has seen in 2020/21), and non-compliance with health and safety regulations can cause a great deal of damage to the workforce, customers, and visitors.  Like all other risks, a health risk too can be the reason for other sections of the business to be rattled in more ways than one.

Global risk

Risks from international markets and operations, tensions across borders that shake trade issues, cultural differences, and FX volatility reasons. Managing global risks is crucial if the company has to survive in the overseas market. If there is a problem in the overseas area, it definitely will also impact domestic business. Long-term damage can be caused if this risk is not managed in time and efficiently.

Supply chain risk

A chain that disrupts businesses like supplier failures, transportation disruptions, inventory shortages, and quality issues. It affects the flow of goods and services to the customer.  This risk has no specific reason and can have many reasons, viz. economic, environmental, geopolitical, technological, and operational factors. Management of this is crucial for the smooth flow of the business from end to end.

Innovation risk

In today’s rapidly changing business landscape, innovation is essential for survival and growth. Companies must constantly introduce new products, services, and technologies to stay ahead of the competition and meet rising customer demands. However, innovation also comes with risks.

Failing to innovate can be just as dangerous as innovating itself. If a company doesn’t keep up with the latest trends and technologies, it risks becoming outdated. Competitors who are quicker to adopt new ideas and processes will gain an advantage. This can result in lost market share, decreased revenue, and business failure.

While innovation is necessary, it’s not without downsides. Implementing new ideas, technologies, and processes can be costly and time-consuming. There’s also a risk that these innovations won’t be successful, either due to technical issues, market rejection, or unforeseen consequences. This can lead to financial losses, reputational damage, and a loss of confidence among stakeholders.

Companies need to be bold and willing to take risks, but they also need to be cautious and strategic. This means carefully evaluating innovations, considering both the rewards and the risks involved.

Key considerations for managing innovation risk

• Market research: Thoroughly research the market to understand customer needs and preferences, as well as the competitive landscape.
• Feasibility studies: Conduct feasibility studies to assess the technical and financial viability of new ideas.
• Pilot projects: Test new ideas on a small scale before full implementation.
• Risk mitigation strategies: Develop strategies to mitigate potential risks, such as diversifying innovation efforts, securing intellectual property, and building a culture of innovation.

By taking a proactive and strategic approach to innovation risk, companies can maximise their chances of success and minimise the potential downsides. Innovation is essential for long-term growth and competitiveness, but it’s important to remember that it’s not without its challenges.

Mitigating strategies to reduce business risks

An integrated approach to managing risks requires a holistic approach and working on them in isolation never works. Mitigating risks requires management and strategies to be in place.

Mitigating identifiable risks by way of a comprehensive management plan tailored to the needs, goals, and kind of business is most important. Constant monitoring and review of strategies, keeping a watch on their effectiveness

• Monitoring: Continuous and stringent risk monitoring and review will ensure mitigation strategies are implemented on time.  It’s an ongoing process that requires assessment and adjustment at regular intervals.
• Technology and tools: Today tools and technology with specialised software aid in risk assessment, facilitate data analysis, automate processes, and provide in-depth and real-time insights into potential risks.
• Case studies: Examples from case studies that have implemented risk assessment strategies and improved on them are a great way to learn, make changes, and fine-tune the in-house processes.

Some of the examples that can be cited are as follows:

Case study: The European Union’s REACH (Registration, Evaluation, Authorization and Restriction of Chemicals) regulation requires companies to assess and manage the risks posed by chemicals they manufacture or import.

Improvement: This regulation has greatly improved the reduction of risks caused by chemical substances. Better protection of human health and the environment has been observed. 

Case study: During the COVID-19 pandemic, various countries conducted risk assessments to restrict the spread of the virus and keep the public health departments informed. 

Improvement: These assessments helped implement cautions like lockdowns, masks, mandates and vaccination schedules which led to reduced transmission. Today, COVID-19 is not something to fear as it was during the pandemic. 

Case study: Banks and financial institutions conduct risk assessments to evaluate credit risk, market risk, operational risk, etc.

Improvement: This helps institutions mitigate risks, therefore ensuring stability, resilience and the ability to hold ground even during economic downturns.

Conclusion:  Risks are part and parcel of life and even more in business. Some are foreseen, some strike with no warnings. Being prepared at all times is when good strategies, tools, education, upgrading, and updating work for the benefit of the business.

When implemented properly and effectively, integrated risk assessment indeed is a powerful tool for managing risks across multiple sectors and disciplines. It helps the business to systematically approach, understand, evaluate and reduce risks. The ripple effect is safer environments, healthier communities and stronger societies.

References

• https://www.indeed.com/career-advice/career-development/risks-business
• https://leantime.io/risk-mitigation-strategies-for-your-business/#h-types-of-risk-mitigation-strategies
• https://www.cascade.app/blog/risk-mitigation-strategies